
Operations, Information and Decisions Papers
Document Type
Journal Article
Date of this Version
9-2014
Publication Source
Management Science
Volume
60
Issue
9
Start Page
2291
Last Page
2307
DOI
10.1287/mnsc.2013.1890
Abstract
This paper formulates and solves the selection problem for a portfolio of credit swaps. The problem is cast as a goal program that entails a constrained optimization of preference-weighted moments of the portfolio value at the investment horizon. The portfolio value takes account of the exact timing of protection premium and default loss payments, as well as any mark-to-market profits and losses realized at the horizon. The constraints address collateral and solvency requirements, initial capital, position limits, and other trading constraints that credit swap investors often face in practice. The multimoment formulation accommodates the complex distribution of the portfolio value, which is a nested expectation under risk-neutral and actual probabilities. It also generates computational tractability. Numerical results illustrate the features of optimal portfolios. In particular, we find that credit swap investment constraints can have a significant impact on optimal portfolios, even for simple investment objectives. Our problem formulation and solution approach extend to corporate bond portfolios and mixed portfolios of corporate bonds and credit derivatives.
Keywords
finance, investments, portfolio optimization, credit swaps
Recommended Citation
Giesecke, K., Kim, B., Kim, J., & Tsoukalas, G. (2014). Optimal Credit Swap Portfolios. Management Science, 60 (9), 2291-2307. http://dx.doi.org/10.1287/mnsc.2013.1890
Included in
Corporate Finance Commons, Finance and Financial Management Commons, Portfolio and Security Analysis Commons
Date Posted: 27 November 2017
This document has been peer reviewed.